Dell's To-Do List: Find New Channels

The sudden departure of a chief executive from any firm is usually regarded as a bad sign.

Usually.

In the case of Kevin Rollins departure from Dell Computer as both chief executive officer and a board member, it seems to be cause for celebration, at least on Wall Street.

"Michael Dell's resumption of the CEO role and Kevin Rollins' resignation indicate a new level of board commitment to serious change at the company," wrote Richard Farmer, analyst with Merrill Lynch, in a research report.

Dell will have to change if it's going to make more headway globally. The Round Rock, Texas-based company's model of direct sales via credit works very well in North America and Europe, which are mature markets with slowing growth. In the emerging, high volume growth markets of China, India and Russia, credit cards are extremely rare, and Dell has had no answer for those marketplaces.

"Dell's go to market strategy is highly dependent upon a direct relationship with its customer. Others have recognized that a channel partner plays a role in financing as well as delivery," said Mark Margevicius, vice president with Gartner.

To put Dell back on the growth path, Dell needs to clear up its public black eyes, such as improving customer service and getting the SEC investigation behind it. More than that, it needs to embrace the growth segments and figure out how to get to those non-Dell friendly countries. It also needs to consider something other than the direct sales market, said Margevicius.

"They need to embrace alternative channels. Customers would like choice in how they buy product. They need to think about how they get to market," he said.

The stock price shot up more than a dollar last Thursday, the first trading day following the news of Rollin's departure, but has since returned to its normal levels. Volume, however, remains extremely high. Thursday volume was 88.2 million shares changing hands, while volume the following Monday was 34 million shares. Dell had been averaging 22 million shares exchanged on a daily basis before Rollins left.

That could mean Wall Street and volume investors are returning to Dell. Brian Sozzi, research analyst with Wall Street Strategies, said Rollins departure was a big boost for the stock. "People think Dell's going to return to their former glory because the founder is taking over," he said.

But Dell has lost a lot of market share to competitors as more people are going to stores to buy computers, and Dell's claim to fame was selling over the phone and on the Web. "A lot of it is just common convenience. Best Buy has added significant quality products and you can leave that day with it, you don't have to wait two weeks for it to arrive in the mail," said Sozzi.

There had been a call for Rollins' head for some time due to several missed quarters, according to Margevicius. "They had been asking the question if Kevin was the right guy to lead the company," he told internetnews.com.

That said, Rollins was not a failure as a manager. Margevicius said Rollins did a magnificent job turning around the internals of Dell, which had been dealing with growing pains as a company when he stepped in. "He was the right guy at the right time. When he stepped in, Dell was in a world of hurt. Dell didn't know how to grow and be efficient. Now it's an efficient company," he said.

However, there's more to a business than just managing the books. Sozzi likened Dell's situation to The Gap, the once-hip clothier that has fallen on hard times. Its CEO, Paul Pressler, recently fell on his sword for making the same kinds of failings as Rollins.

"Pressler cleaned up the balance sheet, but more nimble rivals came into that space took marketshare from The Gap. It's great if you can grow revenue but at the end of the day, you have to extend the business model," said Sozzi.

And that was the problem for Dell. It continued to operate the same old strategy as the market changed around it. "He makes a machine run very well, but in that process Dell became inflexible and a one trick pony. As the market changed and required a new way to look at that business, the machine couldn't adjust," said Margevicius.

State-side, Dell has its own problems. Its once-sterling reputation for customer service has been mud for several years. A basic search on Yahoo or Google would reveal that.

Part of it is due to backlash against outsourcing to India, but also, the Indian help wasn't particularly good. "Shifting their customer service to India really hurt them," said Margevicis. "They really need to clean that up."

Michael Dell has seemingly answered the question as to whether he would stay in the CEO's chair or just keep it warm. On the one hand, he has to say he's in it for the long haul or it will create further uncertainty among shareholders and employees, pointed out Margevicius.

But Dell seems to have gone quickly to work. In a memo sent to staffers, Dell announced he would cut bonuses and the number of direct reports to him. He also declared he was in the job for the long haul.

"I think he means it," said Sozzi. "This is the company he created. He's a sizable shareholder and doesn't want to see it fold. So I think he wants to play a Steve Jobs-like role and swoop in and be a hero."